Merger of concerns with little resolution

On July 19, 1969, the country created history nationalising 14 banks and eleven years later six more.

On August 30, 2019, it was decided to merge 10 public sector banks into four behemoth entities. Prior to that two years ago all associate banks were merged with the State Bank of India. A year later, Dena Bank and Vijaya Bank were merged with Bank of Baroda. The latest merger was in the air for sometime and was announced by Finance Minister Nirmala Sitharaman.

But the very same day the major merger announcement was made, there was another major economic data that was revealed; the country’s GDP growth slumped to a 6 year low of 5 per cent in the first quarter (April-June) of this fiscal. The growth rate slowed for the fifth consecutive quarter with the previous low recorded at 4.3 per cent in March 2013, hinting that things do not augur well for the country's economy.

While the Government has been all out to justify its bank consolidation move, it has also thrown up several issues that could get further complicated.

A top banking expert had doubts about how the economy is going to gain from such a move. A classic case is that of a housewife who keeps some money in a box in the kitchen, some in another box in the store room and some amount under the bed. The total amount with her remains unchanged is simple logic.

The financial soundness of some of the banks do not appear to have been considered while going in for such a sweeping merger. The reasons reeled out have been mainly cost savings from network overlaps. Also, it is the Reserve Bank of India policy to have more smaller banks through its 'on tap' licences or 'payment banks'.

Sitting on a powder keg of bad assets, the merged entities will find this to be a tough nut to crack. The SBI's is a classic case. From a bad debt of Rs 1.6 lakh crore at the time of merger, it added another Rs 16,212 crore at the end of the last quarter. The case is no different for Bank of Baroda with the merger of Vijaya Bank and Dena Bank which has not only hit it's bottom line but also its asset quality.

Punjab National Bank has already been in the news for wrong reasons because of its burden of frauds. On the NPA front, it had over 16 per cent of bad loans which is nearly the same as that of Oriental Bank and United Bank which are to be merged with it.

The scene is no different with Union Bank, Andhra Bank and Corporation Bank whose gross NPAs are around 16 per cent.

Worse still is the Government having to infuse capital into these banks which it done earlier like the Rs 16,000 crore it infused in PNB or the Rs 7,000 crore in Bank of Baroda or the proposed Rs 11,700 crore in the merged Union Bank entity.

There appears reason to believe stuff in the argument that such a consolidation should only help in better administration of handling of the situation in case there is a run on any bank.

It is not without reason that unions argue that the latest decision would mean closure of more banks, more branches and loss of jobs for many when already the Government is finding it hard to surmount growing unemployment. Also, it would be minority shareholders who would bear the brunt.

Even while the Government claims that consolidation is its aim, the policy contradicts this. It may not take much time before there is a flooding of small banks as it is the Reserve Bank of India policy to come up with "on tap" licences which means there will not be any cut-off date for applying for the licences. The minimum initial paid up voting capital for such banks has been fixed at Rs 500 crore. Besides, there is also the policy to promote payment banks with a minimum paid up capital of Rs 100 crore. It may not take long before such banks like the umpteen 'county' ones abroad that run on profit motive rule the roost and decide to ignore social commitments that governed the bank nationalisation of 1969. Nationalisation was done through an Act of Parliament, meaning it had the approval of the people of the country.